Adjustable versus fixed loans

A fixed-rate loan features the same payment over the life of the loan. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. This proportion reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Reliance Mortgage Service, Inc at 562 320-0510 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, so they can't go up over a specific amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in a given period. Additionally, the great majority of ARMs feature a "lifetime cap" — this means that the rate can't exceed the cap amount.

ARMs most often have their lowest rates at the start of the loan. They usually guarantee the lower rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate programs benefit people who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at 562 320-0510. It's our job to answer these questions and many others, so we're happy to help!

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